‘Money makes the world cool down’ – An introduction to climate finance

There are no two ways around this simple fact: dealing with environmental change is going to cost money, in the short term at least. This much is already well established in the minds of even the most optimistic policy makers and campaigners. However, the scale of climate finance, its sources, destinations and even methods of payment are all still up for debate. This blog post will attempt to walk you through some of the key issues in the rapidly evolving world of modern climate finance.

An expensive problem

It’s best to categorise climate costs into mitigation (attempting to reduce greenhouse gas emissions) and adaptation (coping with the changes climate change is already creating). Mitigation efforts involve developing renewable energy systems, supporting efficient building techniques and installing low carbon infrastructure. Adaptation can be even broader, ranging from modifying local food production techniques and reducing the risk of food scarcity under a changing climate to basic disaster relief. There is often a crossover between basic poverty reduction objectives and climate change adaptation. For example, crop failure or drought can easily pose a significant humanitarian risk. None of this comes cheap, and although private companies are beginning to find their place in the climate finance system, much of the burden is on public funds.

Show me the money (or not)

A financial mechanism has existed within the UNFCCC (UN Framework Convention on Climate Change) since its creation. The Kyoto Protocol, the first major international climate change agreement, agreed that wealthier states should send financial support to poorer countries. At COP17 in Copenhagen, the figure of $100 billion a year materialised. This goal still exists with the Paris Agreement aiming to mobilise $100 billion a year in climate funding by 2020. Although this seems like a lot of money, it doesn’t hold much weight when we take a look at the potential global costs of climate change. The 2010 World Development Report estimates needs for mitigation and adaptation activities in developing countries range from $140-175 billion per year for mitigation over the next 20 years, and $265-565 billion a year over the period 2010 – 2050 for adaptation. In contrast to this, the green climate fund (one of the main institutions responsible for channelling UNFCCC climate finance) estimates that the total signed contributions towards the $100 billion goal to be roughly $9.9 billion.

The Fundamentals

The root of the problem lies in the fact that many of today’s most wealthy countries reached their stage of development through the burning of fossil fuels. Even today their (our) economies are still reliant on coal, oil and gas. Just take a look at the graph below, showing the relationship between income and carbon dioxide emissions per person for each country. In the graph the bubble size represents population and the colours are grouped for each continent.

At the same time the damages induced by climate change are beginning to accumulate, and mainly in less wealthy countries which are now being asked not to use fossil fuels to build their wealth and reduce their vulnerability. (Check out our blog on loss and damage to learn more on what these climate induced damages can look like). We can see many African countries (in blue), with low levels of income and tiny carbon emissions on the left of the spread above, yet many of these countries are seeing very real consequences of climate change. It doesn’t take a lot to see a level of injustice here.

For this reason there is relative consensus in the climate negotiations that payments need to be made to assist poorer states in approaching the climate change problem, but this principle can become very complex very quickly! The effects of carbon dioxide accumulate over time, and its effects are never clear cut. It can still be impossible to differentiate between a natural variation in climate and one ‘caused’ by humans releasing greenhouse gases. Even if it was possible, pinning the blame on particular polluters is even less realistic. In fact the whole concept of individual state accountability to climate damages pushed away in Paris, with countries like the USA refusing to accept the language of liability or compensation in the agreement.

To COP22 and beyond

It is no secret that developed state governments face some long term financial difficulty. The UK, for example, sits on over 2 trillion dollars worth of state debt. It’s just not going to be possible for governments to sit the bill necessary to approach global climate change. Instead, a financial and law-making environment must be created to get private funding moving into emissions reductions and sustainable development projects.

Lets not be pessimistic, the money is there, and we’re good at using it. The levels of infrastructure and technology we enjoy today aren’t here from public funding, there here from states creating policy encouraging and facilitating private investment. What is needed is guidance from states and the international community, and we’re moving in the right direction. Big banks are beginning to move their money, and are scaling up their investment in green bonds, green energy and low emissions transport and major funds are quitting the carbon habit. For example, the Portfolio Decarbonisation Coalition, which manages $600bn in assets, committed to divesting from high carbon investments, as did the Fossil Fuel Divestment Campaign, representing 500 institutions and $3.4 trillion in assets. Since Paris, let’s hope that this green momentum continues in global finance, and COP22 will be another important building block in encouraging this.

The scale of our problem should not paralyse action. We have a forum for international cooperation, we have a global agreement in place, we have technology exceeding expectations year on year and we have the collective ingenuity needed for creative solutions. Finding the money to make things happen could very well be one of the last pieces of the puzzle needed to solve the global climate problem.